Cboe Letter to SEC Argues Industry Can Support Cryptocurrency ETFs

By Aubrey Swanson·27 March 2018·2 min read

Key Points

Chris Concannon, president and COO of Cboe Global Markets, wrote to the SEC to argue that approving a bitcoin ETF is feasible.
In January, the agency's staff had questioned whether markets were develo

Chris Concannon, president and COO of Cboe Global Markets, wrote to the SEC to argue that approving a bitcoin ETF is feasible. In January, the agency's staff had questioned whether markets were developed enough and whether the risk of manipulation could be controlled. Concannon's letter says both the derivatives and spot bitcoin markets have progressed to the point where those concerns no longer hold.

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The argument turns on numbers. Bitcoin futures on Cboe and CME haven't yet accumulated enough volume to back an ETF seeking 100 percent long or short exposure. But Concannon expects them to reach the benchmarks set when other commodity futures first received ETF approval. The spot markets are even stronger. Three major U.S. exchanges—Coinbase, Kraken, and Gemini—combined to move $950 million in notational bitcoin volume each day in December. Some days topped $2 billion. That compares to $165 million in October and $410 million in November.

Concannon stated: "As the volumes continue to grow, especially on regulated U.S. markets, the overall spot bitcoin market looks more and more like a traditional commodity market and Cboe continues to believe that the spot market is sufficiently liquid to support a bitcoin ETP."

The sticking point is manipulation. Concannon argues that arbitrage would prevent ETF prices from drifting from bitcoin's spot price. If the ETF traded above the spot price, arbitrage traders would buy bitcoin and convert it to ETF shares for profit, driving the ETF price down. If it traded below, the reverse would happen. This mechanism exists for conventional ETFs too. Bitcoin trades across dozens of exchanges at once. To manipulate the price everywhere would require coordinating across all those exchanges, a task that would cost far more than any profit from the effort.

Cboe has backed this up with concrete measures. The exchange signed a data-sharing agreement with regulators giving them access to trading records across different markets. This lets them spot patterns suggesting manipulation and act against them. Concannon sees this as standard practice as markets mature, and as cryptocurrency infrastructure builds out, bitcoin products will work within existing regulatory frameworks.

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